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Two students going to Montreal/Quebec City for cheap

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A friend and I are planning a graduation trip to Quebec in early July. We would like to stay in hostels in the downtown area of both cities, and are interested in the Jazz festival in Montreal. We were hoping to plan this trip on quite a small budget. We were planning on staying in Montreal from june 29- june 3 and then going to QC until the 7th. Is the bus system reliable? It's significantly cheaper than trains.
Are the youth hostels in good areas?
What neighborhoods should we visit specifically?
We're looking for recommendations for inexpensive tours and restaurants, as well as nighttime activities.

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